Question

The treasurer of a large corporation wants to invest $20 million in excess short-term cash in a particular money market investment. The prospectus quotes the instrument at a true yield of 3.15 percent; that is, the EAR for this investment is 3.15 percent. However, the treasurer wants to know the money market yield on this instrument to make it comparable to the T-bills and CDs she has already bought. If the term of the instrument is 90 days, what are the bond equivalent and discount yields on this investment? (Do not round intermediate calculations. Enter your answers as a percent rounded to 3 decimal places. Omit the "%" sign in your response.)

Bond equivalent yield %
Discount yield %

Answer 1

To calculate the bond equivalent yield and discount yield, divide the term by the number of days in a year, calculate the semi-annual yield, and multiply by 2 to get the bond equivalent yield. For the discount yield, subtract the true yield from 1, divide by the number of days in the term, and convert to a percentage.

Step-by-step explanation:

To calculate the bond equivalent yield and discount yield, we first need to understand the concepts. The true yield or effective annual rate (EAR) for the money market investment is given as 3.15 percent. The term of the investment is 90 days. The bond equivalent yield and discount yield can be calculated as follows:

Bond Equivalent Yield:

1. Convert the term from days to years by dividing 90 by 365: 90/365 = 0.2466 years
2. Calculate the semi-annual yield by multiplying the true yield by 2 (since there are two 90-day periods in a year): 3.15% * 2 = 6.3%
3. Calculate the bond equivalent yield by multiplying the semi-annual yield by 2: 6.3% * 2 = 12.6%

Discount Yield:

1. Calculate the discount rate by subtracting the true yield from 1: 1 - 0.0315 = 0.9685
2. Calculate the discount yield by dividing the discount rate by the number of days in the term: 0.9685 / 90 = 0.0108
3. Convert the discount yield to a percentage: 0.0108 * 100 = 1.08%